At some point most college graduates will come to a confusing crossroads -- should I pay off my student loans now or start saving for retirement? I’ve got your answer in this week’s Money Minute.
Your student loan bills may be overwhelming, but don’t give up on saving for retirement quite yet. First, do what you can to reduce your loan payments. Lots of people don’t realize that they can qualify for an income-based repayment plan. That can potentially lower your monthly payments to as little as 15% of your discretionary income -- AND free up cash for retirement.
Some of you might think, whatever, I’ll just start saving for retirement when I’ve got a good job. But know this: The money you save when you’re young can be far more powerful than anything you set aside 10 or 20 years later. You can thank compound interest for that.
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Take this scenario: A 25-year-old who saves $1,000 in an IRA and doesn’t touch it until she retires at age 66 will have $16,023. Had she waited until age 35 to save, she would only have $8,145 (assuming an average return of 7%).
You don’t want to miss out on a 401(k) match from your employer, either. That’s FREE money you could be leaving on the table. Save at least enough to capture your full match. As long as you’re still able to meet your minimum student loan payments, this should be a no-brainer.
On the flip side, if you’ve got high-interest loans -- say, higher than 8% or 9% -- you might have a valid reason to prioritize student debt first. It's hard to predict retirement investment return but conservative estimates are about 7% to 8% per year. It really depends on what types of investments you choose — stocks are riskier but have greater potential for gains over the long term, while lower-return options like bonds are much more stable — and how well the market is performing at any given time. Most financial planners encourage young investors to invest more heavily in stocks and slowly shift more money into bonds as you age.
The bottom line is this: Saving for your future and paying off past debts doesn’t have to be an either-or proposition. It’s all about finding a strategy that works for you.
More money questions? Shoot us an email at [email protected].
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